GAIL Q2- Net profit up 131% despite high LPG prices| Is it worth investing in?

GAIL is India’s largest gas marketing and transport firm and they also own a petrochemical plant. The company is owned by the Government of India.

GAIL’s Q2 displayed an EBITDA of Rs.34.8 billion, a 44% quarter-on-quarter (QoQ) increase. This can be attributed to very a very strong marketing segment as the LNG prices doubled in this quarter, to $18/mmbtu. GAIL has a long position in several long term LNG contracts and it disposes almost 2-2.5mmtpa internationally on a yearly basis, to mitigate the risk.

There was a huge jump in the Q2 profits due to the natural gas marketing returning to black. The segment posted a pretax profit of Rs.1079 core which is in sharp contrast to the Rs.364 crore loss that was reported last year in Q2.

The company’s net profit doubled to Rs.2,863 crore (Rs.6.45 per share) due to this as this segment started making money for the company again. The net profit 131% higher than Q2 FY21. The revenue from operations increased by 57.65% to Rs.21,515.30 crore. The natural gas transmissions segment was more or less flat.

The petrochemical business witnessed a profit of Rs.364 crore. The EBIT was up 163% QoQ to Rs.3.6 billion. The sales volume was up by 2%. The transmission segment saw an EBIT increase of 14% QoQ to Rs.10.4 billion.

The LPG segment was a great disappointment as the growth is 17% below analyst’s estimate. The sales volume is 1% lower than last quarter. The LPG/LHC production has been 20%-50% lower. As the company diverted by-product propane to the petrochemical segment as feed stock and this led to a lower than average realization for LPG. It can be noted that the LPG prices have increased recently and have been firm recently.

According to the Chairman and Managing Director Manoj Jain, the capex for GAIL in the first half of the year was Rs.3180 crore mainly on petrochemicals, equity and pipeline.  Analysts are worried about the FY23 due to a cascading effect. As winter is nearing, the international gas prices have already started increasing and this will negatively impact the feed stock costs for petrochemical and LPG. This will in-turn lead to the petrochemical profitability decreasing significantly.